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4 Keys to Easier Investing

Mystified by mutual funds? Here's what to look for.

For numbers-challenged folks like me, evaluating stocks can be scary -- a dizzying jumble of ratios, forecasts, and hazy predictions. With mutual funds containing many different stocks, these supposedly "convenient" investment vehicles may seem even tougher to judge.

With studies showing that three out of four mutual funds actually underperform the market, finding a good one's got to be practically impossible, right?

Nope!Four key factors can take you a long way when weighing the merits of an actively managed mutual fund. Best of all, these facts are readily available on most reputable funds' websites. (If not, consider looking elsewhere!) Here's what you need to know:

How well the fund has done, compared with the benchmark, over the long haul.

How much the fund will cost you.

Who's in charge, and how long they've been there.

How often the fund buys and sells its holdings.

Doesn't seem so scary, right? Read on to learn more about why each of these four factors matters.

1. Long-term performance versus benchmarkMost mutual funds clearly list their performance when attempting to lure in new investors. But on their own, the percentage returns they've earned for fundholders can sometimes be deceptive. If a fund has earned 10% a year over the past five years, that's all well and good -- unless the overall market earned 12% a year in the same time frame.

To make sure the fund hasn't been slacking off compared to its peers, check to see how its performance compares to that of its benchmark index. Funds targeting different segments of the market will usually match themselves against comparable yardsticks, from the S&P 500 for large-cap blue chips to the Russell 2000 for small-cap stocks.

When comparing performance, don't just look at a fund's one-year returns. You want to pick funds with a proven record of solid gains, or minimal losses, in markets good and bad. One year's just not a long enough time frame to give you that information. Instead, check out a fund's five- or 10-year performance, or better yet, its performance since inception. Just remember that a great track record doesn't always guarantee future success. (More on that in a bit.)

2. Expense ratio and other feesIn exchange for their (hopefully) expert management of your money, fund managers get to keep a slice of the fund's overall assets each year. The size of that bite, relative to the fund's overall holdings, is known as the expense ratio. The average mutual fund takes 1.4% of its investors' holdings each year. If you find a fund charging less than that -- the less, the better -- you're getting a relative bargain on your investment.

Also, keep a sharp eye out for "loads" -- sales charges that aren't lumped in with the expense ratio. A front-end load dings you when you buy new shares, while a back-end load nibbles away at your money when you sell shares.

Loads erode your overall investment. For every otherwise great fund that charges load fees, you can find a similarly high-performing one that doesn't.

3. Manager tenureA fund's sterling long-term performance means exactly diddly-squat if the people currently running the show weren't responsible for it. New managers won't necessarily run a fund aground just by taking its helm, but there's no guarantee that they'll continue their predecessors' top-notch returns, either.

Look for fund managers who've been around for the long haul, preferably seven years or more. That means they've gained experience steering the fund through good markets and bad. Long-tenured managers don't immediately ensure you a pile of profits, but they're certainly a good sign.

One last thing to ask about managers: Are they willing to invest their own hard-earned cash in the funds they run? It seems like Foolish common sense, after all. Some studies even suggest that funds with greater insider ownership tend to outperform their peers. If your fund company's website or prospectus doesn't list its managers' holdings (or lack thereof) in the funds they run, you can find out for yourself with a little sleuthing through the mutual fund section of the Securities and Exchange Commission's handy EDGAR site.

4. TurnoverEvery time individual investors buy or sell a stock, their brokerage collects a commission fee. Same goes for mutual funds -- and for funds carrying dozens of stocks, and buying and selling their holdings frequently, those commission costs can add up quickly. Guess who ends up footing that bill? (Hint: Not the managers.)

Worse yet, if the sale of a stock generates capital gains for the fund -- and if you hold that fund in a taxable account -- you'll be stuck with that cost, too. Once the brokerages are finished collecting their commissions, rest assured that Uncle Sam will stop by, clearing his throat in a meaningful fashion as he stares long and hard at your wallet.

Turnover helps you gauge how often a fund's holdings change every year. A fund with 4% turnover, for example, only buys or sells that percentage of its holdings in a given year. With 100% turnover, a fund gets rid of its entire holdings, and replaces them with new ones -- every single year. And with 300% turnover, a fund cycles through three entirely different sets of holdings every 365 days. The higher the percentage, the more you'll be on the hook for fees and taxes.

For the most part, investors should avoid funds with high turnover; it's yet another drag on your returns. If you find an otherwise great fund that reaps stellar returns by deliberately pursuing a high-turnover strategy, you can minimize your tax bill by keeping it in a tax-advantaged account, where (Congress willing) Uncle Sam can't get his mitts on it. That won't keep the commission charges from piling up, but at least it won't add tax insult to fee injury.

Putting it all togetherNeed a real-life example? Here's how I used the four factors listed above to make a decision in my own portfolio. For years, I plowed my entire IRA contribution into American Funds' Growth Fund of America (FUND:AGTHX), whose top holdings currently include Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), Oracle (NASDAQ:ORCL), and Schlumberger (NYSE:SLB). On the surface, the Growth Fund seemed like a great choice for my portfolio, and I continue to hold shares in it today. But one crucial item motivated me to start putting new money in other funds.

It certainly wasn't the long-term returns. According to Morningstar, the Growth Fund has returned 14.2% over the past five years, beating the S&P 500 by 3.1 percentage points. The expense ratio's a thrifty 0.63%, turnover's a reasonable 22%, and six of the fund's 10 managers have been on board for more than a decade. With all those sterling qualities, I'm happy to hold on to the shares I've already got for the long haul.

So why am I looking elsewhere for future IRA investments? At my level of holdings, Growth Fund charges a fairly hefty 5.75% front-end load for new share purchases. That charge diminishes as your assets grow, but I'd still rather find load-free funds that offer similar performance.

That wasn't so bad, right?Now that you know the four key elements to seek out when judging a fund, you're ready to start your own search. If you need a little extra nudge -- say, the names of some reputable fund families worth investigating -- check out our Motley Fool Champion Funds newsletter. Advisor Shannon Zimmerman singles out mutual funds worthy of Foolish attention. He's also got lively, refreshingly non-boring interviews with the industry's best and brightest fund managers, who provide interesting insights into their stock-picking strategies. Click here to take a look free for 30 days.

Fool online editor Nathan Alderman is currently researching good funds for his own Roth IRA. It's less entertaining than watching Doctor Who, but a heck of a lot more fun than cleaning the bathtub. Microsoft is a Motley Fool Inside Value recommendation. The Fool's disclosure policy has 0% turnover.